Debunking Five Common Myths About 80/20
Dear 80/20 Mentor,
I have a manufacturing business and the last two years have been very challenging, as they have been for all companies. Starting with COVID and going through about June of 2022, supply chain was very tight and we were slipping on deliveries. We hit all-time lows with on time deliveries dropping to 65%. We’ve recovered nicely, but now I also have inventory that is only turning 2-3x per year.
I’m being told I should reduce inventories, but I’m terrified of OTD dropping and not being able to supply. Yes, it’s tying up cash, but I don’t think I can afford to not serve my customers.
What advice are you giving clients like me during these trying times?
Customer Service or Cash
Dear Customer Service or Cash,
If there was ever an event that made crystal clear the importance of applying an 8020 mindset to one's business, it was COVID-19. Shutdowns and slowdowns of production all over the world meant, pure and simple, that companies couldn't get the items they needed to maintain their shipping schedules with any reliability. Delivery performance, as measured by on time delivery (OTD) percentage, cratered. Inventories ballooned, as companies desperately over-purchased whenever items COULD be found just to ensure that they had items—any items—on hand.
Now, to the question posed, what do we do? Things are better, I can buy things again, but I'm gunshy...I don't want to have to go through the pain of non-stop calls to customers, disappointing them with "your order is going to be late" messages. At the same time, the cash tied up in inventory will ultimately be equally crippling, just not "today."
For the answers, a very good "first thing to do" is to look back at those firms that performed better than their peers during the COVID crisis. Not that these firms didn't feel pain—it's not a stretch to say that every company went through slipping OTDs and fewer inventory turns during COVID. That said, some firms did experience less disruption.
How did they do it?
There is an adage in business that is irrefutable: complexity crushes efficiency. No matter how proficient one gets at manufacturing efficiency, this proficiency will ultimately collapse in a heap when set against crippling complexity. If a firm takes orders from many hundreds of customers, it doesn't matter how true it is that only a couple dozen of them are the vast majority of the revenue: those small customers will (rightfully) demand that their orders be filled. If a firm offers many hundreds of varieties of product for sale and takes orders for all of them, it doesn't matter how true it is that only a couple dozen of them are the vast majority of the revenue. Those small revenue items will still (rightfully) have to be produced.
The fortunes of companies are tied directly to the critical few
During "normal" times, the financial cost of supporting these many hundreds of products and customers is significant, but day-to-day, it is only the financial cost we feel...and only if we look hard enough. What COVID-19 exposed in sharp relief was just how painful, operationally, that complexity is. During normal times, we can support the complexity, we just have to pay for it. During COVID-19, when it was extremely difficult to get anything, those firms with complex product and customer rosters made COVID-19 exponentially worse. No amount of money could magically conjure that which wasn't there to be bought.
On the other hand, the firms that experienced less disruption...How did they do it? Simply put: they were less complex to begin with. When faced with supply chain issues, they took the opportunity to simplify further and prioritize more. They recognized that the fortunes of their companies are tied directly to the critical few, so they focused intently there. This approach allows them to perform extremely well during normal times, and it allows them to weather all bad times (including COVID-19) much better.
For those companies who've not yet learned fully that valuable lesson, there are two very practical courses of action to take now that the effects of COVID-19 are waning.
First, now that companies have seen very clearly how challenging complexity is, it's time to employ time-tested 80/20 methodology and root it out. Don't let a good crisis go to waste—look at COVID-19 as an event to open the curtain and let in the light of realization. Simplify...and then you'll not only be ready for the next inevitable crisis, but you'll perform far better in all ways between now and then.
Second, prioritize formally. COVID-19 forced companies to go through very painful but necessary triage—they determined where they were willing to sacrifice so that they could survive/thrive elsewhere—and companies actually got quite good at it. Don't let that muscle atrophy. Don't go back to your old ways. Rather, understand who those "few dozen" (at most!) customers are that really drive your business, and create an operation within your operation dedicated to them.
Have production equipment and operators dedicated to them, have inventory dedicated to them with amounts set by demand, and never, ever pull from THEIR stock (whether raw, WIP, or FG) to cover an order for a small customer who happens to be quite demanding for their size.
Do this, and you've achieved what you need: outstanding OTD for your critical accounts, and many more inventory turns overall.
Three things will result from this, all of them very helpful:
- Again, your delivery and inventory performance on the vast majority of your business will improve markedly, and your crucial customers will love you for it.
- The separation within your operation of the "80s" and the "20s" (the critical few and the rest, respectively) will allow a bright light to be shined on the true operational and financial performance of each segment, a story that you want to hear.
- When the next crisis DOES emerge, your company will be one of those companies that outperform their peers, and you'll sleep much better. That's reason alone to start 80/20 today!